McDonald's is raising prices and going healthy

McDonald's recent turnaround has involved
various companywide changes. Two of these include implementing a
10-year transition into only using cage-free eggs and
sourcing only chicken without antibiotics. These choices
signal the fast-food chain's attempt to make food healthier, and
while more expensive ingredients will force either higher prices
or slimmer margins, more health-conscious food is a good idea.

Why McDonald's should raise its prices

One way that McDonald's carves a niche in the quick-service food
industry is through offering food at prices cheaper than its
competitors. They achieve this in part through standardization
and inexpensive inputs, and therefore, more expensive ingredients
could raise prices and be seen as a negative for McDonald's
competitive advantage.

However, as CFO Kevin Ozan recently highlighted, higher-priced
healthy options appeal to low-price consumers. The reasoning:
there's more than one type of price-sensitive consumer.

"There's a few different types of customers. There are some value
seekers that look for kind of an entry-level price point value
and want to make sure they're getting a deal at that point, and
there are others, what we call deal seekers, that kind of go
around and look for the best deal around. And so we've got to be
able to attract both of those customers in order to grow."

Ozan clarified that not every McDonald's customer is looking for
the lowest price. Only value seeking customers look for the
cheapest item. Deal seekers, on the other hand, are looking for
an item that provides a certain level of quality for the lowest
price that exists in the market. They're still price-sensitive
customers but in a different sense than value seeking customers.

If McDonald's is looking to target a value seeking customer,
targeting based on health isn't a bad idea. According to the
2015 Nielsen Global Health and Wellness Report, 43% of people
consider food with all-natural ingredients and no genetically
modified organisms very important -- more than any other
attribute examined in the study. While
McDonald's will likely never provide the highest-quality food,
utilizing cage-free eggs and antibiotic-free chicken can increase
their food's quality and appeal to value seekers looking for
better food at lower prices.

The
logo of Dow Jones Industrial Average stock market index listed
company McDonald's (MCD) is seen in Los
AngelesThomson
Reuters

The One Reason I'm Not Loving It

If targeting both value seekers and deal seekers really is
McDonald's goal, they're making one mistake: not creating
products that target both customer bases. Value seekers won't
respond well to higher prices due to higher quality products, as
they're seeking the lowest price.

We've seen price-sensitive consumers respond poorly to menu
changes before. In mid-to-late 2014 when McDonald's raised its
prices, outlets like Bloomberg and Business Insider reported that the move
lead some customers to pursue other options. This is particularly
harmful for McDonald's in relation
to Wendy's — the golden arch's
quick-service rival that targets individuals willing to pay
higher prices for higher-quality food.

According to Fast Food Menu Prices,
McDonald's artisan grilled chicken is priced at $4.39 while
Wendy's ultimate grilled chicken is $4.69. That's only a 30 cent
price difference. Additionally, on the value menu, McDonald's
charges $1.29 for a McChicken sandwich while Wendy's only charges
99 cents for its Crispy Chicken Sandwich. Since McDonald's
antibiotic-free chicken policy is still in the implementation
process, prices only have the potential to rise while
Wendy's isn't making price-changing decisions on feeding chicken
antibiotics.

If McDonald's wants to stay competitive, it can't charge similar
or lower prices than Wendy's and give up its position as the
low-cost option. Instead, if it really wants to target two
customer bases, the company needs to create menu options that
have health-conscious consumers pay for higher quality foods and
reduce prices of lower-quality options for the other base.